Invesco S&P 500 Equal Weight Financials Rides the Recovery

Some of the fund's best-performing stocks over the past year were regional banks with market values below $30 billion.

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A recovering economy has pushed shares in financial firms higher and helped fuel a rally in small- and midsize-company stocks. That has been good for Invesco S&P 500 Equal Weight Financials (RYF). The exchange-traded fund tracks an index that gives equal weight to each of the 65 financial stocks in the S&P 500 Index, rather than awarding bigger positions to companies with larger market values.

Over the past 12 months, that has helped the ETF sail past the typical financials fund and the S&P 500 with a 60.4% return. "When there's a broad economic expansion or recovery like we've seen over the past year, it plays well to an equal-weighted strategy," says Invesco's Nick Kalivas, head of factor and core ETF strategy. "The dominant driver of extra returns in the fund over the past year has been the equal weighting of stocks."

Why RYF's Equal-Weight Strategy Works

The ETF's holdings have an average market value of $38.6 billion, one-third less than the $57.7 billion average market value of the typical financials fund. Indeed, some of the fund's best-performing stocks over the past 12 months have been regional banks, many with market values that fall below $30 billion, including Zions Bancorp (ZION) – up 101.8% over the past 12 months – Comerica (CMA) with a 101.7% gain and Fifth Third Bancorp (FITB) at 90.1%.

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"The fund gets you a tilt to smaller names and a value tilt, too, and those two factors are rewarded over long periods of time," says Kalivas.

The portfolio's equal-weighting strategy helped the fund dodge some bullets, too. Limiting the fund's ex­posure to Berkshire Hathaway (BRK.B), for instance, which would otherwise be the top holding in a market-value-weighted fund, helped because Berkshire, up 32.6% over the past 12 months, lagged the broad market for much of the year.

Invesco S&P 500 Equal Weight Financials, a member of the Kiplinger ETF 20, holds stocks in a variety of financial industries, including insurance, banks, capital markets and consumer finance. Over the past one, three, five and 10 years, the ETF has outperformed the typical financial sector stock fund, with less volatility in each of those periods.

Financials have proved that they do well in the recovery stage of an economic cycle, but this particular early stage has been "untraditional," says Kalivas, because interest rates remained low, thanks to moves by the Federal Reserve. That said, if interest rates rise in the coming months, financials will still prosper. "Higher rates are generally thought to be good for the financial sector," Kalivas says.

Nellie S. Huang
Senior Associate Editor, Kiplinger's Personal Finance

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.